Posts Tagged ‘loyalty’

Consumer payments will experience accelerated change in 2013. Multiple disruptive and innovative companies, particularly 3rd party app developers and retailer branded mobile solutions, will enter the market to challenge the incumbents. Traditional payment processing networks and financial institutions will struggle to keep pace with nimble, tech savvy competitors. “Payments incumbents will leverage their market power to battle disruptors. MasterCard’s new fee structure for “staged” digital wallet providers such as Google Wallet, PayPal and Square” are an early shot-across-the-bow in a fight that will set the stage for payments over the next decade. The legacy technology managing the current payment processing network will be unable to keep pace as new POS and cloud based programs enable merchants and consumers to pick winners and losers. Mobile solutions; coupled with low cost alternative payment, in conjunction with retailer funded rewards, will become more abundant, more accessible, and deliver greater value.

The eco-system is changing. A new “Retailer-Consumer-centric” payments paradigm is emerging. The future of the new paradigm will be shaped by three disruptive digital (POS based combined with IP communication) trends:

◾The POS Payments Cloud: The last 10 years has brought major change to the POS and communications. Less than 10 years ago the POS was a relatively limited device and communications were slow and arcane, at least by today’s standards. The traditional legacy payments processing network relies on processors, associations and financial institutions in conjunction with POS vendors and a “heavy” communications systems like the Hughes satellite network to enable electronic payment. Unlike the consumer and their expectations, change within this eco-system is difficult, time consuming and expensive. POS vendors are setting the slate to disintermediate the traditional network through the introduction of the “payment cloud”. Today’s POS is a powerful device built with open standards capable of supporting a wide range of payment and loyalty solutions. The internet changed the nature of communication allowing low cost, reliable, fast, and secure connectivity. Emerging payment models leverage the combination of POS capability and the internet to disrupt traditional payment economics. “Merchants have a growing set of payment options that do not adhere to the traditional interchange or processing fee model. Some of these options even deliver additional value above and beyond payment processing. As merchants adopt these new payment methods, their expectations will reset and they will expect lower costs and greater value from incumbent payment service providers. Traditional economic models will not disappear overnight, but it would be a mistake for payment incumbents to dismiss the growing number of unique pricing schemes and the disruptors who are moving aggressively to gain scale”. Watch for the emergence of these POS payment platforms in 2013.

◾Mobile Payment: Mobile payment and digital wallets will change the nature of the relationship between the consumer and the retailer. New technology will enable a robust “dialogue” between the consumer and the retailer during the “purchase cycle” allowing the retailer to engage the consumer before, during and after the transaction. Technology “will drive adoption by integrating capabilities that remove friction and transform the payments and commerce experience in contextually relevant ways. These wallets will embed capabilities that can create a more convenient commerce experience for consumers and give merchants a growing set of potential benefits — that may provide a distinct competitive advantage — to evaluate and weigh against the additional costs of wallet acceptance.”

◾ACH & Merchant Issued Rewards: The advantage merchants have in mobile payment is two-fold. First, merchant control access to their mobile payment environment, they will decide what forms of payment are available to the consumer. Secondly, rewards are the key driver for consumers as they choose their method of payment and rewards are controlled by the merchant.

Low cost alternative payments in conjunction with merchant issued rewards will appeal to a broad base of retailers and consumers. The loyalty industry in the US is significantly more than $10 Billion dollars and growing. Current card acceptance fees are in the two percent range adding up to billions of dollars. Merchants who leverage the combination of these two line items will offer consumers powerful incentives. Clearly, Merchants can have a lot of influence regarding payment choice with this type of spending. “Disruptors are creating better, lower-cost alternative products and services that deliver more value and meet broad-based payment needs.” Retailer services will provide consumers with personal, relevant offers designed to drive a more profitable purchasing experience. ACH payment will lead the way towards low card acceptance fees. Retailers who recapitalize these fees as consumer rewards will see increased sales and profits.

It will take a few years before we see the full force of this disruption. Retailers will be hesitant to make the technology changes necessary to support the new payments paradigm. Some will wait as end-of-life requirements make change inevitable, others will jump in early and gain leverage in their market.

2013 will be an interesting year for the payments market, what changes do you see in your organization?

Opportunities are often difficult to recognize and they do not come with their values stamped upon them. It is often hard to distinguish between easy choices and those of opportunity; such may be the case with the retail industry’s reaction to the proposed Visa, MasterCard Settlement. As it stands today the proposed “Brooklyn” settlement has been rejected by nearly all retailer associations like; NACS, SIGMA, NGA as well as multiple retailers including large national and smaller local companies and even Senator Dick Durbin has added his disapproval to the chorus of rejection. It’s fair to say that the proposal is “Dead on Arrival”. Even so, I wonder if by refusing to embrace this settlement an opportunity is being missed.

With so much opposition to the settlement, how is it possible that an opportunity may be missed? The answer lies in the fundamental assertion that retailers can compete for the consumer’s method of payment steering them to low cost payment, rather than relying on legislative price controls or judicial action that seek to control the payments industry. Core to this belief is that there is significant competition in the credit card industry, it just happens to be between banks competing for consumers, rather than between retailers and banks competing for the consumers method of payment. There is nothing unusual about this model, it’s standard platform economics. The more end-users (retailers accepting cards and consumers with cards) on either side of the platform (MC/VISA), the more valuable and hence expensive the platform. This is why banks do not negotiate fees with retailers. Their mission is adding value to the consumer to carry and use their card for payment. The result is richer reward programs that add cost and drive the transaction fees higher. The retailer’s perception is a monopolist market, when in fact, as consumers we all participate in the very same economic activity.

In today’s rapidly evolving payment landscape consumers have many payment options. Surcharging creates an opportunity for the retailer to compete with the associations and promote low cost payment options. The challenge with surcharging is that it forces retailers to compete not just for the consumers purchase, but also for their method of payment and as a result some retailers may choose to use card payment as an economic advantage. Up until the proposed settlement this concept was merely theoretical because the card association rules prohibited the activity. While some retailers had experimented with cash discounts, the concept of charging for credit or debit card use has not been tested. The reason there is no information on surcharging is because it was prohibited by the associations operating rules. The Associations prohibited surcharging because it exposes the real cost of payment to the consumer and therefore allows the consumer to understand that using their card is not free. This capability provides a powerful new tool for retailers to steer consumer payment choice.

Now armed with the tool needed to expose this cost, retailers are more concerned about the perception and customer services issues than the costs of payment. One retailer was quoted in NACS Online as saying he wants customers “impressed by the quality of products and services they receive” lamenting that surcharges for payment may appear to penalize them for the use of the card saying “it does not make for very good customer service”. This statement tends to suggest that the current costs accepting credit cards is acceptable, a suggestion that tends to explain why the opportunity presented by surcharging may be overlooked.

It’s unlikely that we will learn the answers to these questions in the near future. The industry is committed to seeking significant concessions that go beyond the proposed settlement which means the lawsuit is likely to move forward. Stay tuned……

The stage is set for an epic battle between the merchant community and the financial industry to win the consumers method of payment (MOP). This week, BoA joined the list of financial institutions announcing either fees, or cut backs in consumer rewards programs, for debit card use . Senator Dick Durbin sounded surprised when he said of BoA’s actions; “It’s overt, unfair” adding that “Banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works”. Many in the industry had long predicted that this would be the immediate result of the regulation (see my June 13, 2011 Blog). Regardless of the merits of the regulation, or the banks reaction to it, one immediate result is that merchants have the opportunity to steer consumers to a lower cost form of payment (debit): the question; will they be able to leverage this opportunity, or will the payments industry adjust their payments offerings steering consumers to unregulated forms of payment with higher fees i.e. credit, pre-paid cards, etc.

The pivotal decision for merchants is how to recapitalize the anticipated saving from swipe reform and use that money as an incentive for consumers to choose a lower cost form of payment. Many merchants, particularly in the petroleum and grocery industry are already actively competing for method of payment by offering ACH decoupled debit card programs (merchant issued debit) or cash discounts. For these merchants, and vendors offering alternative payments like PayPal or National Payment Card Association, the Durbin Amendment is living up to expectations providing them with a strong tailwind to the merchant and consumer.

Merchants are understandably cautious as they approach payment. While technology, investment and ramp time look like the heavy lift, the real challenge is to understand the economics. Traditionally merchants have relied on the bank and card associations to deliver payments. During the lead up to regulation one argument was that; “there was no competition for payment”. Merchants’ successfully argued this point, irrespective of the intense competition between banks for consumers. What was missing from the debate is that the reason consumers use one form of payment over another is often rewards. These rewards had been paid by the issuers of the card using interchange fees (as much as 50%), and now with regulation, that funding source has disappeared. Therefore merchants can provide consumers with the same incentive to use a low cost form of payment by offering merchant issued rewards.

Finally, there is a saying “He who enrolls; controls”. Issuance or enrollment is a critical question for merchants choosing to compete for MOP using rewards. Assuming that the merchant chooses to offer rewards for a specific MOP, which MOP should it be, cash, PayPal, Google, or perhaps a merchant issued debit card. The smartest strategy might be a flexible approach to payment where rewards are based on the costs associated with the method of payment, regardless of whether the rewards are paid for by the merchant, or a 3rd party.

On December 16, 2010 the fog began to lift on where Section 1075 of the Durbin Amendment would lead as the Federal Reserve Board issued its proposed interpretation of the legislative language. One question on many peoples mind is how the new regulations will impact consumers. Voices on the banking side seem skeptical that the regulation will have any positive impact for consumers sighting Australian studies where retailer prices appear unchanged as bank fees rose and payment options declined. On the other side of the argument, the National Retail Federation welcomed proposed regulations saying “a significant reduction in the fees would result in lower costs for merchants and could lead to discounts for their customers.”

NRF Senior Vice President and General Counsel Mallory Duncan said. “The combination of reducing rates and allowing retailers to offer discounts will go a long way toward stopping the current scheme where big banks take a bite out of consumers’ wallets every time they use a debit card.” He goes on to say that the NFR “will work closely with the Fed as these regulations are finalized to ensure that the reduction in fees – and the amount of money retailers can offer customers as a discount – is maximized.” And so it seems that the stage is set for retailers to offers consumers discounts if and when they use a debit card to pay for their purchase.

In a recent article published in PYMNTS, Katherine M. Robison of O’Melveny & Myers LLP says that “while the Board says it understands and appreciates the importance of debit cards to consumers, it is disturbing how little the interests of consumers entered into its justification for the Proposal”. She goes on to say that “The debit card market is a two-sided one, with merchants who accept debit cards on one side and consumers who use them on the other.” Her point being that in this two-sided market an action that may decrease consumers’ demand for debit (say by making debit transactions less appealing to them) will ultimately decrease the utility of debit to merchants. Further, if Banks add fees to the checking account or the use of the debit card while eliminating reward programs consumers will also find debit less appealing. She adds “So while lower interchange fees may encourage more merchants to accept debit cards, at that point there may be fewer consumers who want to use them.” Enter the role of merchant issued rewards.

Consumers could benefit from a rewards battle between merchants and banks for their method of payment. On one side will be the issuers of credit cards, on the other will be the retailer and the winner could be consumer as they rack up rewards by choosing either credit or debit. Their choice will be simple, choose to use a bank issued credit card and earn rewards like airline miles, or choose a debit card (either bank or merchant issued) and earn retailer funded rewards. The decision will be based on which offer the consumer finds more attractive?

Over the last five years a variety of alternative payment providers. Like National Payment Card Association, have brought forth payment technologies like merchant issued debit cards designed to circumvent the traditional payment processing network delivering a lower cost transaction to the retailer. Now with the Fed’s proposed interpretation of the rule, bank issued debit cards will carry similar fees and so the retailers will face an analogous implementation challenge. How does a merchant motivate a consumer to use a lower cost form of payment? Merchant rewards are the obvious answer. And so the question is; will retailers recapitalize the cost difference between a traditional credit card transaction and the new debit fee and use the savings as a reward? And if not, why would the consumer choose to use a debit card rather than a credit card? Retailers will face a variety of challenges leveraging these new fees to their advantage. Most notably is that the possibility that a debit transaction with merchant funded rewards may actually cost more than the original bank fee for a debit transaction.

The need for customer engagement in retail business is critical to effective marketing programs. Societal changes in the way information and communication is received have diminished the ability of traditional “Top Down” marketing strategies to reach the consumer. Media fragmentation and smaller audiences have reduced the effectiveness of mass; “interrupt and repeat”, newspaper and other print media advertising models. Easier access to information about retailers, products and brands has increased consumers’ choice. The internet and emerging social media along with decreasing brand loyalty and lower entry barriers have increased competition. New products and services reach consumers rapidly bypassing traditional sales and distribution channels. Mass-market discounter’s makes customer loyalty hard to achieve as retailers fight to capture a share of the consumer’s wallet by selling at lowest possible profit margin.

Retailers can avoid the “rush to the bottom” by focusing on “Customer Engagement”. Customer Engagement is about strengthening the emotional and psychological affinity a customer has with a retailer. Consumer loyalty is the best measure of current and future customer purchasing behavior. The most effective way to increase a consumer’s engagement with a retailer is by stimulating the consumer’s loyalty. Retailers can change the consumer engagement paradigm by utilizing a loyalty platform to create and leverage “network effects” to drive affinity.

Customer Engagement typically refers to the engagement of customers with a retailer rather than a brand; a loyalty platform can change that paradigm. When retailers add vendor supported incentives to a loyalty program, the program develops network effects. Network Effects are in play when consumer’s access brand (and retailer) supported benefits through the platform. The retailer, who owns the platform, experiences the value of the network effects when consumers shop in their store. Proprietary loyalty programs are closed loop platforms that leverage network effects to drive customer engagement. Coalition point based programs like “Air Miles” is an example of an open-loop loyalty program that exhibit network effects. Like all platforms, loyalty programs require two different parties to adopt the network to be viable; in this case it is either the vendor or retailer offering incentive on one side of the loyalty platform with the consumer and their desire to enjoy the incentive on the other side.

Loyalty platforms are the tool retailers can use to create the customer engagement needed to compete and win in this new social, technological consumer market. Creating an engaging dialogue with consumers and motivating their loyalty with the retailer is the key to driving both sales and margin. (http://www.linkedin.com/in/peterguidi)

When it comes to loyalty programs and promotional strategy there are two schools of thought in retail. On one hand, there are those who believe that everyday low pricing is the surest way to gain consumers trust and their business. These businesses believe that loyalty programs are just about giving bigger discounts to your best customers. Certainly one very large retailer with “every day low pricing” has reached the pinnacle and it is hard to argue with their success. But, with the giant sitting on top of the low price heap, what can the rest of the retailer community do to gain market share? Certainly you can not compete on price and stay in business very long. Nevertheless, many retailers cling to the monthly coupon flyer or web site promotion offering today’s new deal; the Buckshot approach.

The second school of thought has a different perspective on pricing and strategy. These retailers believe that consumer’s make purchasing decisions for a complex set of reasons and that their behavior can be motivated by incentive. In this model the customer’s loyalty is critical to business success. The concept is to track, measure, and then provide specific incentives to individuals based on their demonstrated purchasing behavior. This science is the most effective use of marketing budgets and is focused on increasing business with each current customer. This is the rifle shot, one bullet for each customer.

At the end of the day it’s all about profit. Profit is the difference between success and failure. When it comes time to pay the bills, or dividends, the only number that matters is the “bottom line”, you either earn a profit or you go out of business, “no margin, no mission”. Regardless of strategy, every program, and every effort must have an ROI. The objective is to make money; buy low, and sell high. It’s hard to make up a loss on volume! Successful retailers negotiate for the best price, terms & conditions and then set prices and launch promotions that will motivate more profitable customer purchasing thus, maximizing profit. Earning a profit is the battle you fight with yourself as you pick the right price point to execute your sales strategy. It takes cunning and courage to set solid price points, avoiding the traps of promotional discounts that erode margin simply to increase “top line” performance. Does your sales strategy drive more profitable sales, or is your strategy to be the low priced retailer turning over inventory for increased sales?

In every contest there is a moment when the game is decided. A touch-down or goal is scored, a home run hit, or a competitor’s doors shuttered. Retail is a lot like sports. Taking the lead and then winning the contest is about momentum and emotion. Employees and customers must be engaged, excited and motivated to participate. Success is defined as both top-line and bottom-line growth. Company strategy needs to set realistic goals designed to achieve long term success. Retailers use incentives to motivate employees and engage customers. Incentives without loyalty programs are simply discounts. Discounts erode margin. Loyalty programs increases both top line growth and increased profits.

Confluence is the act of flowing together; the junction of two or more bodies of water; the place of meeting. Like two rivers, convenience store operators navigate both payment and loyalty relationships. The confluence of these two programs is the card and the consumer. Data suggests that retailers can recapitalize “Swipe Fees” as “Rewards” by leveraging consumer’s willingness to participate in loyalty programs and their increased preference to use debit payment.

According to “The Big Sort, 2009 COLLOQUY Loyalty Marketing Census, in 2008, 51 million consumers participated in Fuel/Convenience loyalty programs. 2009 saw the further expansion of loyalty with a number of retailers launching new programs. That same year, 422 million consumers participated in Financial Services loyalty programs (credit/debit rewards). While the convenience store industry was hammered by low margins under onerous interchange fees, financial institutions used up to 45% of the “Swipe fees” to drive their business forward, achieving nearly ten times the number of participants.

The January 2010 version of “The 2008 Survey of Consumer Payment Choice” published by the Federal Reserve Bank of Boston reveals data demonstrating consumer’s increased participation in debit rewards programs.

\The two studies point to specific trends that support the confluence of loyalty and payments. Consumers now belong to an average of 14.1 loyalty programs, but only 3.5 credit cards. The average consumer has adopted 5 “Payment Instruments”. More consumers have and use debit cards than credit cards (88.2% vs. 78.3% w/ 208% increased usage). Consumers have more “loyalty” to their debit card than credit card with 27.5% of consumers discarding a credit card, while only 5.9% reported discarding a debit card. The analysis indicates that consumers are more willing to join a loyalty program than a payment program. Further when customers use a card for debit, they are less likely to discard the program making for a double win; more enrollment with less attrition.

The conclusion is that growth in Fuel/Convenience loyalty programs and increased debit card usage considered in juxtaposition with the high rate of attrition of credit card users suggests that retailers offering debit rewards as a feature in the loyalty program could recapitalize a significant percentage of “Swipe Fees” as consumer rewards resulting in greater consumer loyalty and increased ROI.

“Pandora opened her jar and unleashed many terrible things on mankind.”

In February 2010 the Consumers for Competitive Choice (C4CC) released a report called “The Costs of “Charging It” in America” by Shapiro & Vellucci: The report offers a number of conclusions, including the proposition that government regulation of interchange fees is Social Justice. Social Justice is a concept used to describe the movement towards a government regulated socially just world. The report suggests that the economics behind payment platforms, Two-Sided Markets and their inherent “Network Effects” create negative “Regressive Cross-Subsidies”. The suggestion is that interchange fees create a system where the poor pay for the privileges of the rich.

In a paper written by Bolt & Chakravorti titled “A Review of Payment Card Economics” published in the November 2009 Lydian Payments Journal concluded “There is no consensus among policy makers or economists on what constitutes an efficient fee structure for card payments”. They go on to say “efficiency of payment systems is measured not only by the costs of the resources used, but by the social benefits generated by them”. Shapiro & Vellucci would seem to agree when they add “The current credit card and debit card systems provide valuable services to consumers and merchants and those services involve legitimate costs and therefore prices. Apparently the concept of profit for risk is not in their equation.

Last week a Delaware politician suggested mandating Full-Service Gas as a job creation initiative. Today the NRF urged Senator Dodd to add Interchange reform to the financial services reform bill. The C4CC published report suggests that Interchange Fee Regulation is a morally just cause towards achieving a level of Social Justice. Are retailers ready to see Social Justice added into their margin equation?

Close on the heels of Barney Frank’s decision not to pursue HR 2382, and as the industry plots its next step, merchants might want to consider the words of Canada’s Finance Minister Jim Flaherty. The Finance Minister is quoted as saying; “(he) would exercise the new powers (sic. impose card use fees) if the industry failed to comply with a proposed VOLUNTARY code of conduct. Merchants’ should ask themselves if this is the type of government intervention that is appropriate in the United States? Merchants might ask if they are opening the chicken coop to the wolf. If the government can regulate interchange fees, what else could they control? More importantly; who will determine what a “fair price” is and will merchants be pleased with a “regulated result”? What if the Government chooses to raise fees rather than lower fees?

One way to evaluate this question is to consider how merchants feel about interchange fees in countries with government regulation? I read a blog about one consumer’s experience with credit card fees in New Zealand and Australia. He reports that most merchants specifically asked if he wanted to pay using signature or PIN? One restaurant is reported to have a sign stating “$15 min.” explaining that credit card fees were too high to allow purchases under $15 using a credit card. Imagine that? Even with card fees at 0.55%, merchants reported interchange fees are too high.

The current political environment is ripe for all sorts of government intervention. Government sponsored higher interchange fees are possible, particularly if interchange is seen a source of tax revenue. The merchant community could find that advocating interchange regulation might lend support to adverse government action in areas like Motor Fuels, Tobacco, Labor and Healthcare and other issues where they seek less, not more, government involvement.

The epic battle between the Merchant Payments Coalition and the Electronic Payments Coalition heated up again this week when NACS spokesman Jeff Lenard was quoted in the America Public Media online journal “Marketplace” saying “Welcome to the war on cash,” in response to increasing debit card transaction fees. Adding; “that the credit card companies have to find new revenue sources” as a result of The Credit Card Reform Act, and that “one of those is going to be interchange”.

Meanwhile the “War of Words over Card Fees” continued as the Electronic Payments Coalition (EPC) reported that Senator Arlen Specter (D-PA) has indicated to Pennsylvania banks that he will introduce legislation which will mirror H.R. 3282. The EPC says that the “legislation will potentially shift the cost of accepting credit and debit cards onto consumers”. Frank Pinto, CEO/President of the Pennsylvania Association of Community Bankers goes on to say “When retailers accept cards in their stores, they receive profits, customers, guaranteed payment, and the golden key to e-commerce–and they shouldn’t have their customers pay for this cost of doing business.”

Rising Signature Debit Transaction Fees are the latest cause for merchant concern. Consumer behavior is changing as debit becomes the preferred “method of payment”. Card Issuers are competing with each other for the consumers business. One result is that the Issuers and Card Associations are promoting the use of Signature Debit over PIN Debit because the signature debit interchange fee is higher than that of PIN debit which funds the reward program. The justification for the different fees is that the financial risks associated with the two types of transactions are different; Signature being more risky than PIN and therefore meriting higher fees. The paradox is that the industry is promoting the use of the riskier transaction assumedly because it is more profitable. The reality is that debit fees are approaching credit card fees, and that the two tiered debit fee is probably going to be phased out in favor of the one higher interchange fee.

Sun Tzu the historical military strategist is well known to have said “Know your enemy”. Another of his lesser known quotes is “opportunities multiply as they are seized”.

The merchant community could heed his advice when thinking about payment. The payment industry has noticed the consumer’s preference for debit. As a result the card issuers are offering richer debit rewards programs as they compete for the consumers business. Merchants can expect to see the cost for these consumer transactions to rise as these programs grow in popularity. Merchants must ask themselves, has the time for war arrived and is the “opportunity” competition?

Retail is a blood sport, period. Never mind the concept of “friendly competition”; the battle for the consumers’ business is a Win/Lose equation. In the retail space, platitudes, like “everybody plays, everybody wins” could not be further from the truth. In the retail business there are winners and losers. Retail sales ... Continue reading →